Tuesday, January 18, 2011


The Canadian government has released new rules concerning mortgages in Canada which would limit the maximum mortgage amortization period to 30 years from 35 years and limit the amount of refinancing that people can use against their homes when they feel the credit crunch. Cold-blooded bankers continue to preach to the public about the financial crisis, the recession and the fact that $5 lattes and flat screen TVs are killing the average family. The government claims that this is about fiscal accountability and responsibility. But what does this mean for the average person? Really?

The word mortgage is actually from the French and is comprised of two separate words: mort, meaning death, and gage, meaning guarantee. So when you get a mortgage, the bank is betting on your death in 20-35 years. Which makes a lot of sense, when you consider that we're all guaranteed to die at some point, and makes a bit less sense when you consider that this was the chosen expression to mean house loan in English. But this term is strangely apt these days, as the complications involved in financing a home pretty much breaks down to this: you're not buying a home, you're buying a coffin.

It's estimated that the average home in Canada is probably a quarter of a million dollars ($250,000). It's also estimated that the average income in Canada sits around $35,000 a year. By any calculation, you can already tell that this is a rough situation. The average amount of student loans for people entering the workforce in their first job sits at about $30,000, a little less than one year's salary for that same person. The average cost of a wedding is $25,000 according to the last Statistics Canada study, assuming that bonbons and flowers are still the order of the day.

Which means that if you're the average person with a degree and a spouse, not to mention a car loan and all the miscellaneous expenses associated with it, and you're entering the workforce on the bottom end of the pay scale, you're already roughly $60,000 in the hole without having collected a single paycheque. Not only that, you're likely a renter and a commuter, meaning that a good portion of your pay is already being swallowed up in general life expenses. Your new job requires clothes, shoes, lunches, and miscellaneous social activities, all of which require money. So not only are you starting with two years worth of salary in debt, you're also expected to contribute to the economy by being a consumer, even if those things are hardly extravagances.

But the banks insist that money is all about choices and that they're not putting undue burden on the average person, which brings us back to the finger wagging over $5 lattes and flat screen TVs. The banks consider that your first priority should be paying off your loans, which means that in order to be a fiscally responsible Canadian, you would basically have to live in a one bedroom apartment on top of a bowling alley with a tiny tube TV with no cable, eating canned soup directly out of the tin under one single light bulb.

So let's assume that you're this fiscally responsible Canadian that lives a no frills lifestyle and doesn't ever go to restaurants or pubs and spends every waking hour chilly and working somewhere. Let's also assume that you have no car and no spouse and that all your friends are happy to go for long walks on the weekends as their primary source of entertainment. And you diligently re-use your tea bags and wear the extra thick sweater during the winter.

Your "get out of debt" plan may be good for 2-5 years. But your "get into a home" plan may be delayed by an additional 2-5 years as you put money aside for that all-important downpayment. No matter; you need to rebuild your credit in any case so that the bank doesn't consider you high-risk and with a clean slate on your debt, your credit rating should be excellent. Which means that if you are truly the fiscally responsible Canadian that the banks want you to be, you should be all set to move into your first home 7-10 years after you enter the workforce. That makes the years of no cable and canned soup worthwhile, right?

But the flip side of the new mortgage rules is that amortizing over 30 years rather than 35 means that your payments increase. And not by a little bit. For the average person, the loss of an additional 5 years to pay down their debt represents close to $1000 more a month in payments. In the long run, of course, less time to pay down your debt means less paid interest. This makes fiscal sense. What doesn't make fiscal sense? Where does the average Canadian, even if they're two full time working adults, find an extra $1000 a month?

Which brings us back to our decadent lifestyle argument. A $5 latte a day, with roughly 30 days a month (freaky February notwithstanding) represents about $150 a month. Granted, this is a lot for just coffee, but it's not a scary total when you think about it. A flat screen tv is roughly $550 on the market now, depending on what kind of sale you hit and whether or not the extended warranty suckers you in. So assuming that you spent $150 a month on lattes and bought one flat screen tv a month, your excessive lifestyle would translate to $700 a month. But most of us aren't buying a flat screen tv every month or reinventing our wardrobes.

It's no wonder that people are feeling the pressure when it comes to money. Financing homes, cars, weddings, kids, retirement and unfortunately, funeral expenses, are stressing people to the max. The added pressure of the bad economy, loss of jobs and an aging population that will require more care and services, are just more burdens to bear.

Let the people have their lattes. It may be the only thing that we have better than our parents.

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